a)Floatation cost adjustment=It is important to understsnd floatation cost first

Floatation cost=whenever we issue new common stock a percentage of cost is f=gicen to brokers it is called floatation cost it is normally adjusted from the rate of return

Now using Dividend growth model

Ke=(D1/p)+g

With floatation =[D1/p(1-f)]+g

This gives Ke

Now whenever floatation adjustments are there Adjusted factor=Adjusted discounted cash flow-Pure discounted cash flow

Hence cost of equity=Ke+Adjustment factor

(it is usually ignored when calculating WACC)

Step2

b)Cost of equity

USE CAPM

Rf+b(rm-rf)

6%+1.5(10-6)

6%+1.5(4%)

12%

Step3

Calculation of cost of debt

Kd and prefeered stock and equity

		Rate (NPER,PMT,-PV,FV)
Kd cost of debt	Use formula rate on excel	=RATE(50,45,-1187.66,1000)	3.6746% After tax 4.49% (please refer the working below
Cost of preferred stock (kp)	Formula =dividend/current market price	5/65	7.69%
Cost of equity Ke	Dividend growth model (D1/P0)+g D1=4.56(103%)=4.6968	(4.6968/35)+3%	16.42%

For working on excel for kd

When semi annual payments are there time is multiplied by 2 aand rate is divivded by 2

Nper=25years*2=50

Pmt=9%/2= 4.5% = 1000*4.5%= 45

PV=1187.66

FV=1000

Annual yield calculation

(1+3.6746%)^2-1

=7.4842%

After tax kd= 7.4842(1-40%)

=4.49%

Step4

Wacc when common equity from retained earnings

Wacc=W(ke)+W(Kd)+W(kp)

60%(16.42%)+30%(4.49%)+10%(7.69%)

11.97%

Step5

WACC when common equity from new stock

60%(12%)+30%(4.49%)+10%(7.69%)

9.32%

Step6

WACC is the cost of capital lower the wacc better it is

Therefore project with higher return should be selected as it will lead to higher value added

Return>WACC

Wacc higher than 11.97%

Is project A(13%) , B (12.5%), C(12%)

The above case is when WACC is when common equity is from retained earnings

In case where

common equity from new stock all the projects can be selected by big easy ltd